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Debt is coming to the tech industry

alexdanco.com

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Re: Debt is coming to the tech industry

#151

Post by omgwtfbyobbq »

kevinventullo wrote: post #88
corford wrote: post #67

Earlier quoted context omitted.

Yeah but unlike a mortgage (secured against one static asset i.e. a house), the article assumes most of this debt will be issued against the strength and quality of a company's various recurring revenue streams (even speculating that different components of this could be financed separately to try and account for the varied risk). Just need to make sure you don't end up with financers/banks/rating agencies colluding…

The article seems to advocate for exactly what you’re warning about: Why not go straight to securitizing senior tranches of your recurring revenue, and moving it off your balance sheet? ... (one paragraph later) ... On the other side, imagine how much investor interest you could get in a diverse basket of recurring revenue from, say, 10 different startups that’ve all raised from Tier 1 VCs. People talk about how grea…

Except for the part about everyone colluding to get good risk ratings. If that collusion did happen, then yes, these would be the equivalent to MBS'. That can happen regardless of what is being securitized.

It still wouldn't get to the level of the housing crisis until those securities were packaged into much larger CDOs and refinanced based on the fraudulent risk ratings.

Re: Debt is coming to the tech industry

#152

Post by cactus2093 »

pcmaffey wrote: post #54

> Furthermore, in the Bay Area Founder-VC scene, FK/PK tension simply isn’t perceived as a problem. Founders increasingly think of themselves as capital allocators who think in bets, and the angel investing scene has brought founders and VCs together as social peers. There’s no FK/PK tension between investors and founders. They all want the same thing, and they all hang out at the same parties. The tension has simply…

> The greatest trick VCs ever pulled was convincing founders, “you’re just like us.”

I don't follow how that's a trick VC's played. Founders really are investing in companies. In one of the most extreme cases, see Adam Neumann going around talking crazy for years making all kinds of big bets that all blew up spectacularly, and after this all erupted as a scandal that tanked the company he was given a cool 1.7 billion dollars to walk away.

If there's any trick being pulled, it's that each founder gets several times more equity than the size of the entire option pool (i.e. than all the employees they will ever hire put together), and are able to do things like take millions of dollars in cash off the table when they raise new rounds of funding.

In successful companies the founders really are much more on the financial than production side.

Re: Debt is coming to the tech industry

#153

Post by ThrowAwayGlen »

gerdesj wrote: post #148

> Debt is going to finally come to the tech industry Bear in mind that the tech industry exists in all countries with a population greater than 10. Also consider that this: > When people in tech want to sound smart, one name you can drop is Carlota Perez. ... is probably nonsense or at best pointing out another point of view. Not all companies work the way you think they do. Not all companies want to be yoked with th…

Thank you. I read this article twice, thought I was completely missing something. No, it's a pretty obvious statement wrapped around pseudo-intellectual ideas of Carlota Perez and presented in an Emperor's New Clothes style where if you disagree with it you're an idiot ("Maybe not all investors get this, but the smart ones do").

Alex was previously at Social Capital, a fund with amazing PR and huge egos combined with very mediocre financial results and awful morals. It would not surprise me at all to see him get back into the game by starting a fund using drivel like this post to sucker LPs into writing him checks.

Re: Debt is coming to the tech industry

#154

Post by csomar »

gerdesj wrote: post #148

> Debt is going to finally come to the tech industry Bear in mind that the tech industry exists in all countries with a population greater than 10. Also consider that this: > When people in tech want to sound smart, one name you can drop is Carlota Perez. ... is probably nonsense or at best pointing out another point of view. Not all companies work the way you think they do. Not all companies want to be yoked with th…

> Not all companies want to be yoked with the burden of continuous economic growth, always beholden to the irksome shareholder.

Then I don't think this whole thing is about you (that is the SM enterprise). Although, you can make a point that the commoditization of IT (like Amazon or more standard ERP systems) can make lots of these small companies obsolete and unable to compete. (you practically can't start a mobile phone company that makes its phone hardware and software today and expect to make enough to keep the lights on)

At this pace, the world will be a few very big conglomerates and many very specialized shops.

Re: Debt is coming to the tech industry

#155

Post by james_s_tayler »

bisRepetita wrote: post #141
neltnerb wrote: post #134

Earlier quoted context omitted.

I agree completely, but it's worth pointing out that a big reason for this is that Cambridge and Boston have vastly fewer and worse connected VCs than the bay area. I did try to pursue VC funding for a hard-tech startup (thin film deposition for making solar panel conductive pastes), but there was really only one VC group that was relevant so there wasn't exactly a surplus of opportunity money-wise just waiting for a…

>don't mind growing slowly (or don't mind never really growing much at all). Nothing wrong with "lifestyle businesses". Are we ever gonna stop saying "lifestyle businesses" for business that don't want to grow 10% per month, and finally call them "businesses" like they are? If you want to make a difference, call them "non-startup". Most businesses don't grow 10% per month, and they're still full fledge "businesses" w…

Agreed.

Re: Debt is coming to the tech industry

#156

Post by lmm »

lifeisstillgood wrote: post #39
lmm wrote: post #30

Earlier quoted context omitted.

> As such the only likely way "debt is coming" is if interest rates climb, giving money an alternative to VC. Surely that's backwards: a lot of money really wants to be invested in debt, and is only doing VC because the returns to debt investing are so bad. Offer those investors a better alternative - comparable returns to a second-tier VC fund (which is not actually that hard), with something they can pretend is a s…

I think we are saying the same thing - at the moment money chooses to be VC funds because normal debt has such low interest rates. Yes I absolutely think there will be shake ups in VC market meaning smaller more frequent and earlier investment (taking the place of what used to be bank business loans). And I think a lot of money will want to do that. But both of these are not debt - and until savings rates globally ch…

> I think we are saying the same thing - at the moment money chooses to be VC funds because normal debt has such low interest rates.

> Yes I absolutely think there will be shake ups in VC market meaning smaller more frequent and earlier investment (taking the place of what used to be bank business loans). And I think a lot of money will want to do that.

> But both of these are not debt - and until savings rates globally change then there will be plenty of supply of money and interest rates will remain low.

Low interest rates on normal debt are exactly what creates an opportunity for a novel kind of debt, which is what the article is talking about. Right now there's a lot of money in VC equity that would rather be in any kind of decent-yield debt - even novel debt backed by unconventional collateral. As and when interest rates rise, all that money will go back into conventional debt and the opportunity will go away.

Re: Debt is coming to the tech industry

#157

Post by Seufman »

rossdavidh wrote: post #55

"Any one customer may be unknowable, but cohorts of customers can be modelled and understood decently well." Just substitute "mortgage" in this sentence, think back on events of the last decade, and you can see what is horribly wrong with this article. Lots of debt, all given to tech startups, which will almost all go bust with the first recession. Let's see, what does that remind me of? Of course, if you believe tha…

The difference here is that most investors in these kinds of "securities" being issued by tech companies would demand more data than the investors in securitized mortgage assets did. In lieu of performance data, investors in MBS relied on ratings from ratings agencies that were dependent on the business of the banks that issued the securities. The failure of ratings agencies to accurately assess the risk in the securities is the reason the MBS vehicles grew in popularity (they all looked AAA!) and also why they exploded.

Re: Debt is coming to the tech industry

#159

Post by zapita »

cactus2093 wrote: post #152
pcmaffey wrote: post #54

> Furthermore, in the Bay Area Founder-VC scene, FK/PK tension simply isn’t perceived as a problem. Founders increasingly think of themselves as capital allocators who think in bets, and the angel investing scene has brought founders and VCs together as social peers. There’s no FK/PK tension between investors and founders. They all want the same thing, and they all hang out at the same parties. The tension has simply…

> The greatest trick VCs ever pulled was convincing founders, “you’re just like us.” I don't follow how that's a trick VC's played. Founders really are investing in companies. In one of the most extreme cases, see Adam Neumann going around talking crazy for years making all kinds of big bets that all blew up spectacularly, and after this all erupted as a scandal that tanked the company he was given a cool 1.7 billion…

Adam’s story is not over, he is under investigation for fraud.

Re: Debt is coming to the tech industry

#160

Post by ceohockey60 »

IIRC there is at least one Silicon Valley example of this already: Zappos pre Amazon acquisition, debt from Wells Fargo. It was forced upon Zappos b/c VC fundraising dried up, not a deliberate choice, but ended up working out well b/c its GMV was both growing and becoming predictable.
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